Stock Market Gains May Rotate into CRYPTO! A Must Read! (SPY)

Welcome world, as we take an important step away from crypto, to assess something that could have significant implications in this asset class that we love so much. What I have before you, is the SPY , which is the ETF that tracks the S&P 500 . If you recall from my SPY post on 3/3, I warned that equity markets appeared to be gearing up for a major decline, and now, that decline is really beginning to materialize. What I'm interested in, is how extreme pressure in equity markets, could impact the crypto space. So, without further ado, let's jump right in to the chart!

Looking at the daily chart , you can see that the SPY has plummeted — closing slightly below the bottom of the channel. If you recall from my 3/3 post, I said "You can see that the 200 EMA is converging with the bottom of the channel, as it nearly disappears into the trendline . This convergence is strengthening the bottom of the channel as support, but if it is broken, the bears will take out two major levels in one fell swoop." As you can see, that has happened exactly. The bottom of the channel has fallen, and the EXTREMELY important 200 EMA has fallen with it. For those of you that don't know, the 200 EMA is an institutional moving average, that institutional investors watch very closely. With that said, developments like this don't go unnoticed. So the SPY has closed below the channel and the 200 EMA .

Now, there are a lot of fundamental reasons why equity markets are facing pressure. They range from interest rate hikes, to trade war fears, questionable valuations, enormous pressure on bonds, the charts being technically overextended, a new Fed Chairman, and many other things. Regardless, the charts tell us everything we need to know. The SPY here, is telling us that the stock market is about to experience some intense downside pressure, if a swift recovery doesn't materialize. In reality, however, a recovery doesn't seem imminent. The MACD is rolling over violently, as the sell-side momentum explodes to the downside under a bearish crossover. Volume is also primarily red, and Friday's bar was well above average, causing the market to close at the lows of the day, beneath the 200 and the channel. So a massive selloff may be imminent, as investors lock in the enormous profits that they've made since Trump took office.

The question is, do we see some of the enormous profits start to rotate out of equities, and into other asset classes, such as the beaten down crypto space? I think that is definitely a possibility, but we will have to wait for the stock market selloff to really accelerate, to know for sure. Obviously, assets like gold are going to get a boost, and thankfully, I have been long the GLD through options for a few months now. My point is, stocks are almost certainly going to plummet, and rightfully so, given the growing list of cons to owning stocks right now. This could be the breath of life that crypto needs.

I'm the master of the charts, the professor, the legend, the king, and I go by the name of Magic! Au revoir.

***This information is not a recommendation to buy or sell. It is to be used for educational purposes only.***

-Magic loves you-

Comment: My 3/3 SPY post:

I agree here. I think BTC and ETH will prob see big inflows. How do you recommend that a beginner learns about trading options?
what would be the best way to short the stockmarket?
data dash did a easy to follow video on basics of why stockmarket could tun for newbies who want to understand debt, fed policy, buy backs, etc and why this affects price!
$PSY hit bottom 200MA. Will it go lower?

Absolutely yes but I don't care, I just put all of my father in law account into SPY.
are you serious? same people who dump their investments in stock market will dump in cryptos
+2 Reply
very informative; and the discussion below even more so;
MPC, please see the link below. I ran into it when I first started researching crypto. While it is only a thesis it does seem to lend to the concept that when people see the stock market as a volatile loser, they will be interested in moving money into crypto, at least Bitcoin. Please correct me if I am wrong. It makes sense, where people see that investors wouldn't want to pull the trigger on crypto because it's volatile, I suppose it becomes a situation where I'd rather have positive volatile than negative.

planetary iaretheanimal
@iaretheanimal, Interesting. I see a couple cons and pros. Pros would be that BTC is an asset that moves differently than the stock market. Good to hedge.
Cons: everything else. Highly risky speculative asset that is digital. A lot of issues surrounding the digital space right now with social media and a risky volatile, non physical asset. Might have people worried and not invest into anything. Most people do not even understand crypto. I guess we will see.
powderpc iaretheanimal
@iaretheanimal, I thought your paper had a lot of interesting technical aspects that I'll have to spend more on. However, I think there are a few fundamental problems that could be major flaws. One is the simplistic nature of the model, in which information asymmetry and liquidity constraints are excluded.

From other research, we know that these are two major factors that influence price action. Just as an example, another paper documents how 2 bots were able to drive BTC prices from $250 to it's ATH in 2013. This would invoke both information asymmetry and liquidity issues as they relate to what could be a "fair" price. Having an information advantage and being able to control liquidity (i.e. if you're the exchange you can "credit" yourself Bitcoin and/or dollars to influence the market) might precipitate a crash as a prisoner's dilemma plays out where everyone rushes for the exits at once. In a more transparent and fair market perhaps this "bubble" effect would be more subdued and liquidity would also be deeper due to lower volatility. So I think in the case of 2013-2014 you have to look to the very obvious factors that played into both the "bubble" and the crash (i.e. Mt. Gox and the Mt. Gox bots).

As far as asset rotation goes, I'm not sure how you came up with the conclusion that higher VIX = rotation to crypto as we have seen that LOWER VIX = rotation to crypto (which I thought you said in your paper). Given diminishing returns from other yield generating assets due to low interest rates there has been a significant rise in speculative investing behavior all across the board. This is standard for the market and Bitcoin and crypto as an asset class have seen a big range of VIX but generally has yet to experience a high interest rate business cycle and since this bull run started late 2016 we've seen VIX at persistently low levels as a result of growth expectations from corporate tax cuts. Higher interest rates signal higher costs and lower expected returns so the higher volatility that ensues signals risk aversion and that's why money gets pulled from equities, real estate, etc. and put into safe havens. Given that Bitcoin has proven to be less a safe haven than a highly speculative asset class in which volatility is a key feature, it would make more sense that equities and other investments rotate into haven assets while crypto sees some money rotate into other speculative, but better regulated asset classes (like Gold, VIX, FX ) that start providing better returns as equities see a correction/possible bear market.

Given that crypto has zero correlation to any asset class the rise of crypto seems to me a symptom of central bank distrust. Given that this is likely to continue in perpetuity I don't think there's any particular "rotation" that's likely to happen other than increased allocation from traditional and institutional investment that has yet to happen due to the lack of regulatory oversight in crypto markets. Given the current trend should we start to see the CFTC and SEC clean up some of the mess left by 2017's crypto bull run and institutional entities such as exchanges catch up in developing better platforms and better customer service I think we will naturally see continued "rotation" into crypto as it is still on a tremendously positive growth trajectory. Any other asset class that goes 26.5X in less than a year then gets cut down to 11.33X would still be celebrated, but instead, we're seeing all this negative talk as if Bitcoin is "dead" when the reality is that smart money is watching this all play out and choosing an optimal entry point that makes sense given regulatory and other risks.

As a corollary to the idea that crypto is fundamentally an asset class driven by speculation when Bitcoin becomes "overbought" and sees diminishing returns in a bull market you see rotation to altcoins as they become relatively "cheap" and provide higher potential yields for speculators. Then in a bear market this rotation reverses. Rather than calling this "rotation" I would call it a "substitution effect".
+3 Reply
@powderpc, Wow! Thanks for that incredibly informative perspective. I myself didn't write the paper, just stumbled across it researching before I got into crypto. There is much to be said in regards to your points on asymmetry and liquidity constraints, and I had overlooked that when I first read the paper, more so because I believe the ability to short and long BTC will now give institutions (banks, hedge funds) the ability to game the system even if only to gain on working together to get the spread. I get the feeling however that as the market becomes regulated their will be a consumer sentiment that will drive funds into the crypto market that were reticent to do so before and that may be the goal of institutions. After all, they have their angles to make money on a consumer level as well. That being said, I would imagine major firms offering crypto opportunities would alleviate some concern and will indeed foster wider acceptance of investment in the crypto space, especially as the developing products come to full fruition and use. Remains to be seen and I sincerely hope we are still at the starting gate and all of us will see plentiful returns.
+3 Reply
powderpc powderpc
@powderpc, With all that being said, while the technicals of equities markets are looking poor, one thing we know about DJT is that he is 100% unpredictable and nearly 100% ineffective as a policy maker. So while he's doing a lot of talking we've already seen that the reality is that he hates looking bad and will reverse his positions almost as quickly as he takes them. Given corporate tax cuts have already been put into law and the overall slow rate of interest rate increases there's no certainty that we're seeing anything more than a DJT driven market tantrum. If you follow/trade MXN/USD then you'll know what I'm talking about. Equities markets clearly haven't seen this play out before but the market for USD/MXN has seen an entire cycle of 1) market moving based on a faithful expectations based on what DJT says followed by 2) a complete reversal based on a more tempered expectation based on the reality that DJT does a lot of talking that results in very little effect. Maybe the markets are seeing his staff leaving en masse and think he might be more capable of wrecking the economy but we know also 1) he can't read and 2) he has no ability to make policy and finally 3) he will blame someone else if the policy fails so if we presume policy failure and a reversal of that policy, it's safe to say that at the end of the day we're probably going to get a brinksmanship type of maneuver, perhaps like Brexit, where there's a lot of talking but in reality not the apocalyptic outcome that everyone's projecting.
+2 Reply
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